Governments rely on outside contractors to assist them with a variety of key functions. One of the many services companies can provide is solutions to bring down the cost and improve the outcomes of the corrections and detention system. Among the leaders in that area is CoreCivic (NYSE: CXW), which is currently the nation's largest owner of partnership correctional, detention, and residential reentry facilities.
Here's a closer look at this leading government-focused real estate solutions provider.
CoreCivic company profile
CoreCivic is a diversified government solutions company currently structured as a specialty real estate investment trust (REIT). However, the company's days as a REIT are drawing to a close because it plans to become a taxable C corporation on January 1, 2021. CoreCivic is making that move in hopes of enhancing its financial profile so that it can modernize and expand its operations.
CoreCivic currently manages nearly 19 million square feet of real estate used by government agencies, making it the largest private owner of government-utilized real estate. It has three operating segments:
- Safety: The company manages 14.7 million square feet of correctional and detention facilities, with a combined 72,689 beds.
- Property: CoreCivic owns 3.3 million square feet of space, including corrections facilities and other government service agency properties that it leases back to government agencies.
- Community: The company operates 700,000 square feet of community corrections facilities, with 5,394 beds.
CoreCivic's safety division, which operates safe and secure corrections facilities, is its biggest moneymaker at 85% of its NOI in 2019. The property group, which develops and acquires facilities leased to government operators, contributed 10% of its NOI in 2019. Finally, the community segment, which provides residential reentry services, supplied the final 5% of the company's NOI last year.
Since most of the company's NOI comes from operating instead of owning real estate, the transition to a traditional C corporation makes sense. That move will give CoreCivic greater flexibility to expand the services offered in its community segment, which weren't available under the REIT structure.
As mentioned, CoreCivic is transitioning from a REIT to a C corp. The company made that decision following a review of its corporate structure and capital allocation alternatives in 2020. It determined the best path forward was to retain the cash flow it formerly paid out in dividends to maintain its REIT status and use those funds to reduce debt. That would enhance its financial flexibility to pursue attractive growth opportunities, such as new developments in its properties segment; help modernize the correctional infrastructure in the country; and optimize its safety segment's existing bed capacity. It would also allow the company to return capital to shareholders once its balance sheet is on a firmer foundation, including share repurchase and a reinstated dividend.
One reason the company felt compelled to make the switch and focus on reducing its debt is that it's getting harder and more expensive for private corrections companies to access capital from outside sources. In recent years, several leading banks have stopped lending to operators of private prisons because they're increasingly taking a stance on social justice issues, which they feel many prisons aren't addressing.
In addition, the industry has come under greater scrutiny from Congress over concerns it's profiting from incarceration instead of working toward improving inmate outcomes. That's causing investors and analysts to shy away from these companies, which has weighed on valuations, making it more expensive for them to sell stock to finance growth.
Those financial issues have led CoreCivic to move toward diversifying away from the correctional and detention industry in recent years. For example, in early 2020, the company closed a deal to buy 28 properties with 445,000 square feet of leasable space for $83.2 million. The federal government leased all the properties through the General Services Administration. The portfolio services several federal agencies, including the Social Security Administration, Department of Homeland Security, and the Office of Hearings Operations. That deal enhanced the company's property segment while diversifying it from the corrections sector.
Aside from acquisitions, another growth driver for the company is securing new government contracts. For example, in September 2020, CoreCivic won an intergovernmental agreement between Cushing, Oklahoma, and the U.S. Marshal Services to use CoreCivic's 1,692-bed Cimarron Correctional Facility in Cushing. The company had planned to idle that facility because of lower inmate populations in Oklahoma due to COVID-19 and the state's budget issues. Instead, that facility will house federal prisoners for the marshals.
CoreCivic stock price
CoreCivic has done an abysmal job creating value for REIT investors in recent years.